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Did QuantumScape Just Say Checkmate to Tesla?

Renewable and sustainable energy are emerging as a popular investment choice for energy investors. Electric vehicles (EV) are part of this trend.

Tesla is arguably the leader in EV adoption. However, QuantumScape (NYSE:QS) has also received a lot of attention since its IPO in 2020.

The main distinction between Tesla and QuantumScape lies in battery technology.

Tesla vehicles use lithium-ion batteries. In recent years, the company has invested significantly in a new model of lithium-ion batteries, the so-called 4680 cells. QuantumScape, on the other hand, is developing a solid-state battery.

Although Tesla has long eschewed solid-state batteries, there are indications that the technology is more energy efficient than current lithium-ion models. The main argument surrounding solid-state batteries versus traditional lithium-ion technology is that they are capable of faster charging times, lower costs for drivers and longer range.

This all sounds great on the surface, and begs the question why Tesla isn’t also investing in solid-state batteries.

Let’s examine QuantumScape’s current projects and assess whether the battery maker could give Tesla an edge in the EV market.

QuantumScape is making progress, but…

QuantumScape has made some big strides so far in 2024.

According to the company’s first-quarter shareholder letter, QuantumScape has achieved its first major milestone this year: shipping its newest battery cell, called Alpha-2, to potential customers.

Considering how intense the EV market is, this advance from QuantumScape could promise confidence for investors. However, there is always more to the story. Let’s take a look at QuantumScape’s business and explore why Tesla is pursuing alternative solutions.

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Battery cells for an EV

Image source: Getty Images.

…there’s a reason Tesla isn’t following suit

The chart below illustrates some key operational metrics for QuantumScape. As of March 31, the company had $192 million in cash on its balance sheet. Additionally, with approximately $817 million in marketable securities, QuantumScape has total liquidity of approximately $1 billion.

QS chart of cash and equivalents (quarterly).QS chart of cash and equivalents (quarterly).

QS chart of cash and equivalents (quarterly).

According to management, QuantumScape has a maturity date until the second half of 2026, given the current pace at which it is spending its cash reserves.

While this is encouraging, keep in mind that QuantumScape will continue to invest heavily in research, development and capital expenditures in the coming years. Since the company isn’t generating revenue yet, there isn’t much room for error in expenses and capital allocation.

Tesla is the superior investment

Given the number of bumps in the road impacting Tesla’s growth, some investors may wonder if QuantumScape has a better return given the momentum. Plus, with shares down 30% so far in 2024, it’s logical to think Tesla’s best days are in the rearview mirror.

Personally, I don’t see it that way. Despite slowing growth, Tesla has some catalysts that I think will pay off in the long run. QuantumScape, on the other hand, is still in the exploration phase of a new technology that may be superior to existing energy sources in electric vehicles, but for which no tangible business results can be demonstrated.

Beyond batteries, Tesla is pursuing autonomous driving technology. although AlphabetWhile Waymo has proven to be a formidable competitor, I think Tesla has the edge as the company has collected over 1.3 billion miles of driver data. This amount of data allows Tesla to train its self-driving car software at an efficient pace compared to its peers.

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This is especially lucrative because Tesla could benefit in the long run by licensing its autonomous driving software to other automakers. Moreover, Musk appears to be taking this ambition extremely seriously, as he recently met with Chinese regulators in hopes of closing a deal to integrate his autonomous driving technology into cars in the region.

Moreover, Tesla is also making waves outside of EVs through its developments in robotics products in the field of artificial intelligence (AI).

Solid-state batteries for electric vehicles are a relatively new concept. As the chart above indicates, the costs associated with producing and manufacturing this technology come with a high price tag.

While the progress in Alpha-2 is impressive, investors should keep in mind that these batteries are still just prototypes. This implies another subtle risk with QuantumScape, and why Tesla isn’t pursuing solid-state batteries.

Even after enormous investments, QuantumScape still has to produce its batteries on a large scale. This is another challenge the company will face in the future as solid-state batteries become more widely adopted.

It is entirely plausible that QuantumScape’s solid-state batteries will become an industry standard in the EV market. However, I think this is unlikely.

Even in mass production, solid-state batteries will command a premium for some time. This will only impose significant costs on automakers like Tesla, who will then be forced to pass these costs on to consumers in the form of higher vehicle prices.

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I think this is exactly why Musk remains content with using lithium-ion batteries. Tesla has identified several other areas to complement its EV business, and would prefer to focus financial resources on those opportunities.

While QuantumScape could absolutely expand beyond the EV market, Tesla has a first-mover advantage in many different opportunities.

For now, I see QuantumScape as a speculative investment at best. For investors looking for growth in an established company with long-term prospects, I think Tesla is a wiser choice than QuantumScape.

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Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Adam Spatacco has positions in Alphabet and Tesla. The Motley Fool has positions in and recommends Alphabet and Tesla. The Motley Fool has a disclosure policy.

Did QuantumScape Just Say Checkmate to Tesla? was originally published by The Motley Fool

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